Accelerated Depreciation: Boost Solar Savings

One of the most impactful benefits for commercial solar customers in India is Accelerated Depreciation (AD). If you’re a business considering solar, understanding the concept of accelerated depreciation can be a game changer, significantly reducing your tax liabilities and boosting your overall return on investment (ROI).

What is Accelerated Depreciation?

Accelerated depreciation is a tax incentive that allows businesses to write off the value of assets, like solar systems, faster than the standard rate. This results in higher tax deductions in the early years, reducing taxable income and providing immediate financial benefits.

Current Depreciation Rates in India:

Under Section 32 of the Income Tax Act, solar power systems qualify for a 40% accelerated depreciation rate.
This accelerated rate is applicable only to businesses or industries, not individual or residential users.

How Does Accelerated Depreciation Work?

When you install a solar system, the capital cost is recorded as an asset in your company’s balance sheet. With accelerated depreciation, you can claim up to 40% of this cost as a deduction in the first year itself.

Calculating the Benefits: A Simple Illustration

Let’s take a practical example to illustrate the benefits of accelerated depreciation.

System Cost: ₹50,00,000
Accelerated Depreciation Rate: 40%
Depreciation Claim in Year 1: ₹20,00,000
Tax Rate for Business: 30%
Tax Savings: ₹20,00,000 × 30% = ₹6,00,000

This ₹6,00,000 is what you save in taxes in the very first year, boosting your ROI significantly. Over the next few years, you continue to benefit from the depreciation until the entire system’s value is accounted for.

Key Benefits of Accelerated Depreciation

1) Substantial Tax Savings: Reduces taxable income, enhances profitability, and frees up funds for reinvestment or expansion.

2) Shorter Payback Period: Lowers taxes, speeds up ROI, and shortens the solar investment’s payback period.

3) Boosts Cash Flow: Immediate tax savings improve liquidity, allowing funds to be used for other business needs.

4) Supports Sustainability Goals: Financial gains with solar align your business with sustainability standards and boost your corporate image.

5) Simplifies Financial Planning: Early tax deductions give a clearer view of investment returns, aiding in better planning.

Eligibility and Applicability

Accelerated depreciation is available for:

Commercial and industrial entities that own the solar system.
Entities that have taxable income under the Income Tax Act, allowing them to benefit from tax savings.
The deduction is available only in the year in which the asset is put to use.

To get the most out of it you can :

1) Consult a Tax Professional: Work with a financial advisor to understand how accelerated depreciation fits into your overall tax strategy and what kind of savings you can expect.

2) Plan the Installation Timing: The timing of your solar installation can impact your eligibility for depreciation claims. Ensure the system is commissioned and in use within the financial year you want to claim the benefit.

3) Document the Asset Value Clearly: Maintain clear and accurate documentation of the cost, installation, and commissioning of your solar system. This will simplify the process of claiming depreciation.

Conclusion

Accelerated depreciation is more than just a tax benefit; it’s a financial tool that makes the case for solar investment even stronger for businesses. If you’re planning to go solar, now is the time to capitalize on this benefit.

Got questions? Feel free to schedule a call let us help you make a smart, sustainable, and financially rewarding investment!